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Despite Election Uncertainty, Markets Climb on Expectations of Divided Government

  • Markets climb on expectations of a divided government following Tuesday’s election
  • Investors bet on Biden presidency but a Republican majority in the Senate, whcih would limit the possibility of sweeping policy changes
  • Health and tech stocks see major gains

Investors abhor uncertainty, and the current state of the U.S. election would seem to be exactly what the markets fear. Ballots are still being tallied after Tuesday’s election, with Americans waiting to see who will be seated in the Oval Office next year and which party will control the Senate. Yet markets are on the rise on expectations that the partisan divide in Washington will continue, stymying any major policy changes and increasing the chances of a stable market.

Before the election, the market expectations were for a Democratic sweep of Congress and the White House. Investors are now betting on a Biden presidency with continued Republican control of the Senate. This arrangement would enable the GOP to block major changes sought by Democrats, such as health care reform, greater scrutiny of major tech companies, and higher taxes on corporations, capital gains, and wealthy individuals. At the same time, investors anticipate some advantages to having Joe Biden in the White House rather than Donald Trump, such as more stability in trade policy.

Stock and bond prices have been increasing steadily since Tuesday, with health and tech stocks seeing major gains. By contrast, stocks for infrastructure, renewable energy, and other companies expected to see a boon from a “blue wave” saw a dip in value.

The market also expected that a Democratic sweep would lead to a larger stimulus bill to boost the economy and alleviate the effects of the COVID-19 pandemic. The stimulus is more likely to happen in the short term but on a more modest scale, with Senate Majority Leader Mitch McConnell saying it will be the Senate’s priority when it reconvenes next week.

A contested election could lead to a sharp drop in the stocks in the near term. While Biden is leading in the electoral count, Trump has filed a number of legal challenges in battleground states, increasing the likelihood of a protracted dispute over the results.

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